Question

# Rusty Corporation purchased a rust-inhibiting machine by paying \$53,500 cash on the purchase date and agreed...

Rusty Corporation purchased a rust-inhibiting machine by paying \$53,500 cash on the purchase date and agreed to pay \$10,700 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 12%. The machine reported on the balance sheet as of the purchase date is closest to: (FV of \$1, PV of \$1, FVA of \$1, and PVA of \$1) (Use appropriate factor(s) from the tables provided.) \$75,111. \$85,600. \$139,100. \$128,611.

\$128,611.

Working:

 Value of Machine will be the present value of all payment made. a. Present Value of quarterly payment = Quanrterly Payment x Present Value of annuity of \$ 1 = \$           10,700 x 7.020 = \$           75,111 b. Present Value of annuity of \$ 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.03)^-8)/0.03 i 12%/4 = 0.03 = 7.020 n 2*4 = 8 c. Value of Machine as of Purchase date = Cash payment + Present Value of Quarterly payment = \$           53,500 + \$       75,111 = \$       1,28,611

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